DP4029 | Urban Labour Economic Theory


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In this Paper survey some recent developments in urban labour economic theory. We first present a benchmark model in which firms set efficiency wages to prevent shirking and to compensate workers for commuting. We show that both wages and unemployment depend on commuting costs, and that housing prices as well as location are based on workers? wages. We then extend the benchmark model in two different directions. First, by assuming that workers? effort depends on distance to jobs, we show how firms draw a red line beyond which they do not hire workers. Second, by introducing high relocation costs so that workers do not change residence as soon as they change employment status, we show that efficiency wages now depend on distance to jobs. Finally, we use these theoretical models to give some microfoundations of a well-known stylized relationship: the spatial mismatch between residential location and workplace.